The Texas-Mexico Economy

and its Uncertain Future

2017-18 Annual Report • William J. O’Neil Center for Global Markets and Freedom • SMU Cox School of Business
TABLE OF CONTENTS

A Message from the Dean..................................1

Texico: The Texas-Mexico Economy

and its Uncertain Future....................................2

Bordering on a Great Divide.............................5

From the Periphery to the Center.....................10

To Frack or Not to Frack.................................14

2017-18: Year in Review.................................17

Global Economic Freedom .....................19
State and Metro Economic Freedom........21
Texas Economic Freedom.......................23
Student Enrichment and Public Outreach...24

The William J. O’Neil Center for Global Markets

and Freedom was founded in 2008 with an initial
grant from William J. O’Neil, a 1955 SMU business
school graduate, and his wife Fay C. O’Neil. Its
broad mission is the study of why some economies
prosper and others do poorly. The center’s programs
promote understanding of how capitalism works
among the general public, policy makers, business
managers and the next generation of business
leaders. To these ends, the O’Neil Center teaches
SMU Cox students, conducts economic research,
publishes economic reports, sponsors conferences and
educates the public through the media and speeches.

Design by WiswallMcLainDesign
A Me ssa ge f r o m t h e De a n
My first year as SMU Cox dean
took me far beyond the SMU
campus, the DFW area and even the
state of Texas. The school’s students,
alumni and supporters are spread
around the world, and I’ve gotten
to know some of them in South
America, Asia, Europe and cities all
across the United States.
I traveled to Mexico more than any
other place—a total of three times.
In April, I was in Mexico City as a
moderator for a symposium hosted
by SMU’s 2-year-old Mission Foods
Texas-Mexico Center, one of the
business school’s on-campus partners.
I serve on the center’s board, and we
met a group of business leaders and
presented new research relevant to the
shared economy of Texas and Mexico.
A few months later, I went to El
Myers moderating a Texas-Mexico Center program at SMU
Paso with the Texas-Mexico Center for
a summit on the critical importance of
cross-border economic integration.
The growing economic connection
between Texas and Mexico is the topic
of this year’s O’Neil Center Annual
Report essay. “Texico: The Texas-
Mexico Economy, and its Uncertain
Future,” written by O’Neil Center
founding director W. Michael Cox and
co-author Richard Alm, discusses why
integration took so long to really get
started, how it’s paid off over the past
two decades and what has prevented
Texico from reaching its full potential.
For years now, Cox and Alm have
teamed up to spearhead the O’Neil
Center’s research project on the
Texas economy, so they already
know full well how much Mexican
trade and migration contribute to
the state’s prosperity. They spent the
past six months on a deep dive into
the Mexican economy—looking not
only at statistics and recent events
but also at the history of Mexico’s
economic policies.
In the essay, Cox and Alm
acknowledge concerns about Texico’s
future. In so many parts of the world,
North America included, a resurgent
economic nationalism challenges
the consensus on the advantages
of opening borders for business.
Companies in Texas and Mexico, the
prime movers in seizing the Texico
opportunity, can long longer count
on their nations’ commitment to the
policies that make Texico possible—
thus the title’s uncertain future
for this dynamic and diverse cross-
border economy.
Matthew B. Myers
Dean, Cox School of Business
O’Neil Center 2017-18 Annual Report 1
 TEXICO The Texas-Mexico Economy
and its Uncertain Future
By W. Michael Cox and Richard Alm

The Rio Grande takes a sharp eastward
turn in the barren Chihuahuan desert
west of El Paso, then meanders more than
1,254 miles before emptying into the
Gulf of Mexico just east of Brownsville.
The river forms the border between Texas
and Mexico, neighbors with a long and
complicated history.
For most of this shared history, the river
acted as an economic boundary as well
as a physical one. About three decades
ago, that began to change. Many of the
impediments to cross-border business
were swept away over the span of just 10
years, giving Texas and Mexico companies
more freedom to do business.
As the Rio Grande receded as an economic
barrier, trade and investment surged to
record levels, helping create the sprawling
and diverse economic space we denote by
the portmanteau word Texico. The name
captures today’s reality—that the Texas
and Mexico economies are now by most
measures highly integrated and becoming
more in sync with each passing year.
Envisioning Texico as its own economic
space highlights key issues in the process
of cross-border integration—the interplay
of economics and policy in shaping its
pace and depth and the trap-laden path
to fully realizing its promise. The journey
of these two neighbors also shows the
potential and perils of integrating a rich
economy and a poorer one.
Economics tends to look favorably
on breaking down barriers that impede
the exchange of goods, services, money
and ideas. The widely touted benefits of
opening up economies include gains from
specialization and trade, a more efficient
allocation of scarce resources, greater
global competitiveness, higher consumer
welfare and transfers of knowledge and
technology relevant to business.
Integration delivers its progress by
unleashing powerful and disruptive market
forces that toss producers, workers,
suppliers and customers into a crucible
of international competition. Most
successfully adapt and prosper; some find
the new environment too much, leaving
them worse off.
As winners and losers shake out, the
existing economic order takes a beating—
so it’s not surprising that Texico has
critics as well as champions. The naysayers
made little headway while a succession of
governments in both the United States
and Mexico supported policies to keep
their economies open.

2 O’Neil Center 2017-18 Annual Report

 “The past quarter century gave companies in Texas and
Mexico more freedom to do business. They’ve responded
with gusto, making myriad connections ... What’s been
gained so far, however, pales in comparison to what Texico
could become if kept on track.”

The past decade has seen a fraying of business opportunities.

the consensus favoring greater integration.
As we write this essay in the late summer
of 2018, Texico’s future is caught up in
the greater drama of a world rehashing
the old battle between adherents of open
economies on one side and economic
nationalism on the other.
Voters fed up with all the hubbub of
economic change are casting ballots for
new leaders who campaign on turning
back the clock and restoring old ideas that
favor protection over production, isolation
over integration. With the ground shifting,
Texas and Mexico find their economic
partnership at risk.
The challenge to the integration
orthodoxy comes at a critical time. The
past quarter century gave companies in
Texas and Mexico more freedom to do
business. They’ve responded with gusto,
making myriad connections, most good
for their companies and good for their
customers. What’s been gained so far,
however, pales in comparison to what
Texico could become if kept on track.
Untapped opportunities abound.
Just over two decades in, Texico remains
very much a work in progress—its future
brighter than its past. Both sides of the
Rio Grande would suffer if the revival of
economic nationalism smothered the full
realization of the economic partnership
between Texas and Mexico.
The Right Time—at Last
Economic integration is an organic
process, driven by the private sector. It
unfolds through countless individual
decisions on what to buy, sell and
produce, where to invest, how to exploit
available technology and use labor and
other resources and when business risk-
taking is manageable.
The process benefits from geographical
proximity, transport and information
infrastructure and other ties that facilitate
connections across borders. Geography
and technology impose some constraints
on how deeply economies come together,
but most impediments to integration are
imposed by governments, usually for the
benefit of entrenched domestic interests.
True integration requires economic
freedom and market forces. Governments
can try to forge cross-border economic
ties, but integration led by the state instead
of the private sector ends as colonialism.
Economies don’t start integrating in
earnest unless the economics and policy
are both right. On the economic side,
each partner must offer something the
other values—labor, capital, raw materials,
technology, potential customers, or any of
these in combination. On the policy side,
economies must be open enough to allow
the private sector to capitalize on available
It took a long time for Texas and Mexico
to get it right. When Texas was part of
Mexico’s northernmost state in the early
1800s, economic collaboration between
Texico’s north and south was minimal
because 900 miles of rough terrain and bad
roads separated San Antonio and other Texas
settlements from the heavily populated and
relatively rich region of central Mexico.
Integration only became less likely after
Texas declared its independence in 1836
and joined the United States in 1845. The
acrimony of war lingered south of the border,
and Texas’ drive to integrate focused in
other directions, shipping cotton, beef and
eventually oil to the rapidly industrializing
U.S. and European economies.
Throughout the 1800s and well into
the 1930s, tariff walls protected the U.S.
market—although Texas and the rest of the
South, as exporters of farm products and
importers of manufactured goods, generally
opposed them. U.S. protectionism hardly
mattered to Mexico, a largely agricultural
economy with undeveloped ports or
railroads that couldn’t supply much
beyond metals to the emerging American
juggernaut.
In the closing decades of the 1800s, Mexico
sought to industrialize under President
Jose Porfirio Diaz, a polarizing figure who
served seven terms in the decades after
1876. He welcomed foreign investment,
with some success in mining, railroads and
manufacturing. Even with the advantage of
proximity, Texans didn’t lead the charge.
Mexico needed capital, and the places to
find it were the financial centers of the

O’Neil Center 2017-18 Annual Report 3

Northeast and Europe, not commodity-
producing Texas.
After revolution deposed Diaz in 1911,
Mexico entered a long period of economic
nationalism. The country adopted an
import-substitution strategy that curtailed
imports to nurture home-grown industries.
In 1938, President Lazaro Cardenas struck
economic nationalism’s most decisive blow
by seizing foreign-owned oil operations.
While Mexico hunkered down behind its
import substitution orthodoxy, the United
States jettisoned its protective tariffs in
the wake of the Depression and World
War II. The country led a 60-year global
march toward freer trade, taking Texas
along with it. When Mexico was ready for
a more open economy, it faced few barriers
to doing business across the Rio Grande.
In Mexico, import substitution spurred
industry and growth, particularly during the
Mexican Miracle in the decades after World
crushing public debt, capital flight, triple-
digit inflation, a corrupt cronyism riddled
with monopoly and a withered private
sector. For a while, the petrodollars of the
1970s oil boom kept Mexico afloat, but
“When Mexico was
the good times came crashing down when
ready for a more open oil prices plunged in the early 1980s.
economy, it faced The decade’s falling oil prices roiled
Texas’ economy, too. The state had
few barriers to doing what it took to bounce back from deep
business across the recession—an entrepreneurial business
culture with the freedom to find new paths
Rio Grande.”
to success. What emerged in the 1990s
was a big, highly diversified and outward-
looking Texas economy, with oil no longer
so dominant.
War II. GDP per capita more than doubled To the south, President Miguel de la
from less than $4,000 a year in 1950 to Madrid, facing a severe economic crisis when
more than $10,000 in the early 1970s. taking office in 1982, made the momentous
The miracle didn’t last. A closed decision to abandon the inward-looking
economy isolated from foreign competition dogma in favor of a stunning opening
left Mexico with bloated government, to the rest of the world. He swept away

Slow to Gain Traction

EX H IBIT Bilateral trade—the sum of merchandise exports and imports—was below 0.5 percent of U.S. gross domestic product until

1 1974 and below 1 percent until 1991. It exceeded 3 percent from 2013-15 (left panel ). Even with a surge after Mexico’s
revolution and the influx of Bracero farm workers, migration to Texas remained below 200,000 in every decade until 1980.
In an era of tighter immigration enforcement, it surged in the 1990s and then receded (right panel ).

Mexicans coming to Texas

3.5% 600,000

3.0% 500,000

2.5%
400,000
U.S.-Mexico Trade as a Percent of U.S. GDP
Mexican Migration to Texas
2.0%
300,000

Bracero program,
1.5% 1942-64
NAFTA 200,000
implemented,1994 Forced repatriation
during the
1.0% Depression
Mexico 100,000
joins GATT
0.5% Mexican Revolution,
1910
0
18 -29
18 -39
18 -49
18 -59
18 -69
18 -79
18 -89
19 -99
19 -09

19 -29
19 -39
19 -49
19 -59
19 -69
19 -79
19 -89
20 -99
20 -09
-16
19 -19

0.0%
20
30
40
50
60
70
80
90
00

20
30
40
50
60
70
80
90
00
10
10

1869 1881 1893 1905 1917 1929 1941 1953 1965 1977 1989 2001 2013
18

4 O’Neil Center 2017-18 Annual Report

the country’s barriers to foreign trade
and investment and joined the General
Agreement on Tariffs and Trade (GATT),
the multinational pact that certifies the
rules for cross-border commerce. (Since
then, GATT morphed into the World Trade
Organization.)
Mexico jettisoned fixed exchange rates.
To thwart politically driven monetary policy,
it enshrined the independence of Banco de
Mexico, its central bank, in the constitution.
State-owned enterprises were sold to the
private sector. Carlos Salinas de Gortari,
the next president, negotiated the North
American Free Trade Agreement (NAFTA)
with the United States and Canada to
cement the open-market reforms. With
Texas’ economy already open, conditions
were right for Texico—at last.
Texas and Mexico lived as neighbors for
decades—so why did it take so long for
cross-border business to start booming?
Throughout the 1800s and most of the
1900s, neither economics nor policy were
right, owing mostly to U.S. protectionism
and Texas’ commodity-based economy.
In the second half of the 20 th Century,
U.S. policy improved, but Texas didn’t
rapidly diversify until after the 1980s oil
bust. The same disruption sent Mexico’s
policy veering in a radically new direction.
It’s not too much to say that the genesis
of Texico was the wreckage of the 1980s.
A quick look at trade and immigration
will confirm the timing of Texico’s origin.
Data on state-level trade go back only a

B o x 1 Te x a s a nd M e x i co, B y the Num b e rs

Bordering on a Great Divide
Texas was once part of Mexico’s northernmost province,
relatively poor and isolated, separated by an arduous journey
from the population centers and wealth far to the south. After
going their separate ways in 1836, the economies of the state
and its former country took different paths.
Texas eventually cast its lot with the United States,
becoming part of a rich and dynamic economy. For Mexico,
economic progress took place in fits and starts, and the World
Bank ranks the country among the second tier of upper
middle-income countries.
Mexico is more than three times larger than Texas, with
Mexico Texas
Landmass (square miles) 758,400 268,597
Miles of coastline 5,797 367
Population (2017) 129,163,276 28,304,596
Median age (years) 28.8 34.2
Employment (2017) 56,086,808 16,982,868
Average years of schooling (2015) 8.6 13.3
Population 25+ with graduate or professional degree (2015) 2.1% 9.7%
Population 25+ with bachelors degree or higher (2015) 14.8% 28.4%
Population 25+ with high school degree or higher (2015) 33.3% 82.4%
Average annual hours worked 2,255 1,866
Average workweek (hours) 43.2 35.8
GDP ($2017 millions) 2,344,197 1,696,206
GDP per capita ($2017) 18,149 59,927
GDP per hour worked ($2017) 18.53 53.52
Average hourly wage ($US) 6.79 25.39
Growth in GDP per employed person 1990-2017 5.4% 73.6%
Growth in industrial output 1990-2017 131% 188%
Growth in manufacturing output 1990-2017 81% 196%
Crude oil production (millions of barrels in 2017) 723 1,283
nearly five times the population (see table below). More people
are working with longer hours, producing a bigger GDP.
Yet, on most measures of economic well-being, Texico’s
north is much better off than its south. Texas surpasses
Mexico by being far better educated, working fewer hours
to produce a higher per capita GDP and average wage. Texas
has moved farther along in the development path, with fewer
workers in farming and manufacturing and more in services.
Texans have 10 times the average net wealth of Mexicans,
and Texas households are more likely to own many everyday
consumer products—from cars to smartphones.
Mexico Texas
Workers in agriculture (2016) 12.9% 2.0%
Workers in industry (2016) 25.7% 15.3%
Workers in services (2016) 61.4% 82.7%
Mean net wealth per adult ($2017) 22,346 204,533
Living space per person (square feet) 354 787
Households with one or more passenger cars (2016) 46% 95%
Households with complete plumbing facilities) (2016) 68% 100%
Households with a refrigerator (2016) 86% 99%
Households with a washing machine (2013) 64% 79%
Households with a clothes dryer (2013) 6% 78%
Households with a microwave oven (2013) 44% 97%
Households with a dishwasher (2013) 12% 80%
Households with air conditioning (2013) 13% 98%
Households with central heat and air (2013) 13% 91%
Households with a computer (2016) 46% 90%
Households with access to broadband internet (2016) 39% 80%
Households with a smartphone (2016) 46% 81%
Texas merchandise exports to Mexico ($2017 millions) – 97,701
Mexico merchandise exports to Texas ($2017 millions) 89,833 –

O’Neil Center 2017-18 Annual Report 5

 Trade Among Neighbors few decades, so we use national statistics
to provide the historical sweep. They
E X H IBIT Among states and countries, Mexico ranks as Texas’ leading market for both
show that bilateral trade was relatively
2 imports and exports, and Texas ranks first for Mexico (top tables ).Texas stands
apart from other states in trade with Mexico, leading in value by far and ranking
insignificant from 1869 to the late 1970s
(see Exhibit 1, left panel, Page 4). Trade
second in trade as a share of state GDP (bottom chart ).
rose in the 1980s but didn’t take off until
2016 2016 the early 1990s—after Mexico opened its
State or Country Mexico’s Exports Percent State or Country Texas’ Exports Percent
market, joined GATT and signed NAFTA.
1. Texas 80,958,010 21.6 1. Mexico 92,039,140 12.2
The migration surge was recent, too.
2. Michigan 49,038,080 13.1 2. Louisiana 84,081,297 11.1
Few Mexicans came to Texas until the
3. California 46,345,060 12.4 3. Oklahoma 51,168,077 6.8
decades after the Mexican revolution (see
4. Illinois 11,706,950 3.1 4. California 31,174,385 4.1
5. Ohio  7,947,960 2.1 5. Illinois 30,694,743 4.1 Exhibit 1, right panel). The United States
6. Arizona 7,447,940 2.0 6. Ohio 23,891,409 3.2 forcibly repatriated Mexicans during the
7. Tennessee 7,324,040 2.0 7. Canada 19,965,660 2.6 Great Depression, and migration resumed
8. Georgia   6,469,970 1.7 8. Florida 17,349,696 2.3 with the Bracero program to admit
9. Florida 5,780,630 1.5 9. Pennsylvania 16,170,992 2.1 agricultural workers.
10. China 5,411,244 1.4 10. Arkansas 16,050,815 2.1 The pace of migration built slowly over
Other 145,516,810 38.9 Other 374,560,552 49.5 the next few decades, then took its Texico
  Total 373,946,694 100.0 Total 757,146,766 100.0 jump in the 1990s before ebbing as U.S.
2016 2016 border controls tightened or Mexican
State or Country Mexico’s Imports Percent State or Country Texas’ Imports Percent workers stayed home to take advantage of
1. Texas 92,039,140 24.6 1. Mexico 80,958,010 10.7 job opportunities in Texico’s south.
2. China 69,520,671 18.6 2. California 57,357,706 7.6
3. California 25,260,270 6.8 3. Oklahoma 42,151,650 5.6
Ties that Bind
4. Japan 17,751,109 4.7 4. Louisiana 39,035,922 5.2
5. Germany 13,877,975 3.7 5. China 36,637,860 4.8
Texico churns out an annual GDP of
6. South Korea 13,612,211 3.6 6. Illinois 29,051,056 3.8
more than $4 trillion, good enough to
7. Michigan 12,044,650 3.2 7. Kansas 22,439,756 3.0
rank as the world’s sixth largest economy,
8. Canada 9,631,526 2.6 8. Tennessee 17,702,090 2.3
9. Illinois 9,488,860 2.5 9. Ohio 17,269,865 2.3 just behind Germany and ahead of Russia.
10. Arizona 8,285,200 2.2 10. Indiana 17,113,176 2.3 Beyond sheer size, the region’s defining
Other 115,552,887 30.9 Other 375,674,436 49.6 characteristic is the gap between north
Total 387,064,499 103.5 Total 735,391,526 97.1 and south. Texans are more educated,
better paid and wealthier, and they’re
Share of Gross State Product
14% more likely to own the signature products
of successful economies—from cars to
12% Michigan:
$65bn,13.0% smartphones (see Box 1, Page 5). By
10% Texas: comparison, Mexicans work harder for
$188bn,11.1%
U.S. States’ Trade with Mexico lower pay, and they’ve struggled to build
8%
Total trade wealth and afford the modern world’s
6% household goods.
Other U.S. states Share of
State Output Two centuries ago, Central Mexico was
4%
the richer place, envied by the Tejanos living
2% in a sparsely populated and relatively poor
California:
$73bn, 2.7% part of northern Mexico. The relative merits
0% of open vs. closed economies had a lot to do
$0 $25 $50 $75 $100 $125 $150 $175 $200
Total of Merchandise Exports and Imports (in Billions) with the reversal of fortunes—as did policies

6 O’Neil Center 2017-18 Annual Report

shaping economic freedom, the integrity of
institutions and investment in human capital.
Open for Business
E XHI BIT With NAFTA’s Implementation in January 1994, direct investment broke out
Forging a stable, dynamic economy that
could close the development gap motivated 3 of the staid pattern of the previous 40 years, reaching new heights for both
the United States and Mexico (top chart ). The surge in investment coincides
Mexico’s opening in the mid-1980s. The with a strong rise in Mexican sales among U.S. multinationals (bottom chart ).
country saw its salvation in foreign trade,
investment and know-how. Since then, these FDI as share of U.S. GDP
0.8%
flows arrived from many places—with big
Cross-Border Foreign Direct Investment Flows
contributions coming from Texas.
0.7%
Exhibit 1 showed that merchandise trade
between the United States and Mexico 0.6%
grew 4.5 times faster after Mexico joined Mexico to the U.S.
GATT. Domestic and foreign trade differ, 0.5%
but mixing U.S. states with countries shows
how Texico’s trade skews on a north-south 0.4% U.S. to Mexico
axis. Mexico trades more with Texas than
any country, including China. Texas trades 0.3%

more with Mexico than with any other

0.2%
state, including neighbors Louisiana and
Oklahoma (see Exhibit 2, top tables, Page 6). NAFTA implementation,1994
0.1%
Since 1990, Texas has sprinted far ahead
of other states in trade with Mexico.
0.0%
Exports moving south and imports 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
moving north totaled $188 billion last Share of U.S. GDP
1.8%
year, or more than 11 percent of gross
state product, putting Texas out by itself 1.6%
in doing business with Mexico (see Exhibit
1.4%
2, bottom chart).
Sales of U.S. Multinationals in Mexico
Trade with China, a low-wage 1.2%
competitor of Mexico’s, consists mainly
of finished goods ready for sale. Within 1.0%
Texico, intermediate goods make up the
0.8%
biggest chunk of what’s shipped across
the border. The difference stems from 0.6%
geography—deliveries from Mexico
usually take days not weeks. 0.4%

Cross-border supply chains illustrate why

0.2%
the Texas and Mexico economies are more
formidable combined rather than separated. 0.0%
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
In Texico’s relatively compact geographical
area, companies linked by roads, railways to sell at a better price. and Mexico’s northern states.
and air service combine low-cost labor, Automobile production comes to mind— Texas companies are finding business
skilled professionals and cutting-edge for good reason. General Motors’ operation opportunities in Mexico—among them,
technology in a highly efficient production in Arlington and Toyota’s factory in San cosmetics-purveyor Mary Kay Inc.
network. The companies emerge more Antonio are among the 27 assembly plants and telecommunications giant AT&T
competitive in the global marketplace, able and more than 230 parts suppliers in Texas Inc. Mexican companies are heading

O’Neil Center 2017-18 Annual Report 7

 Working for Texas northward and expanding their businesses,
with tortilla-maker Mission Foods and
EXH IBIT Most Mexican-born U.S. workers are concentrated in Texas and a few other
Cinépolis, a movie theater chain, both
4 states (top chart ). Mexicans make up more than half of all immigrants
working in Texas, with their biggest contribution—by far—in construction,
settling in the Dallas area.

followed by manufacturing and agriculture (bottom table ). Setting up business in other countries
entails foreign direct investment
California (FDI)—money spent to gain a physical
Texas presence on the ground. For most of
Nevada
Arizona its history, Mexico has been labor rich
New Mexico
Illinois and capital poor; attracting more FDI
Colorado was a key goal of the country’s market
Oregon
Utah opening. Data aren’t available for Texas’
Washington FDI in Mexico, but state firms no doubt
Oklahoma
Kansas played a big role as the U.S. total soared
Georgia
to unprecedented levels since NAFTA
North Carolina
Arkansas went into force (see Exhibit 3, top chart,
Nebraska
Indiana Page 7). Most U.S. companies invest in
Tennessee Mexico to establish supply chains that
Florida
New Jersey lower production costs.
Wisconsin A relative trickle before NAFTA,
South Carolina
New York Mexican FDI bound for the United States
Minnesota
Alabama
picked up sharply in the past two decades.
Michigan For Mexican investors, of course, the
Connecticut
Missouri motive for FDI is almost always tapping
Louisiana into the rich U.S. consumer market. Many
Virginia
Maryland companies start U.S. operations selling
Pennsylvania to Hispanics, then broaden to a larger
Ohio
Massachusetts and more diverse market once they’ve
0% 2% 4% 6% 8% 10% 12% 14% 16% established themselves.
Mexican Immigrants as Share of Total Employment
Not all U.S. companies invest in Mexico
Foreign-Born Share of All Texas Employees (16 Years and Over) to produce. Some enter the market to sell

Born in Other
to consumers who display an affinity for
INDUSTRY
Foreign Born Born in Mexico Latin American Born Elsewhere U.S. brands. FDI catering to consumers
Countries
has paid off: U.S. multinationals’ sales
Agriculture1 20.8% 12.2% 2.3% 6.4%
Construction 41.8 33.6 6.6 1.7 jumped from 0.5 percent of U.S. GDP
Manufacturing 27.4 14.7 3.7 9.1 in 1989 to around 1.6 percent of a much
Wholesale Trade 20.3 10.7 3.5 6.2
higher GDP in the most recent data (see
Retail Trade 17.7 8.8 2.7 6.2
Transportation2 20.2 10.4 4.0 5.9 Exhibit 3, bottom chart).
Information 16.2 4.1 2.9 9.3 Integration doesn’t just entail goods
Financial Services3 13.4 5.0 2.1 6.4
Professional Services4 23.1 11.2 3.5 8.5 and capital finding their markets. For
Health Services5 16.7 6.6 2.0 8.1 millennia, migrants have been moving
Arts and Recreation, 25.0 15.6 4.4 5.0
across borders to find work. Mexicans
including Food Service6
Public Administration 8.5 3.4 0.9 4.1 who want to work legally in Texas—or
Other 32.1 18.0 4.9 9.2 anyplace else in the United States, for
Statewide Average 22.0 12.0 3.3 6.7 that matter—face strict immigration
1. Agriculture, forestry, fishing, hunting and mining. 2. Transportation, warehousing and utilities. 3. Finance, insurance, real estate, rental and leasing.
4. Professional, scientific, management, administrative and waste management services. 5. Health care, educational services and social assistance.
limits intent on keeping foreigners from
6. Arts, entertainment, recreation, accommodation and food services.

8 O’Neil Center 2017-18 Annual Report

competing for jobs with U.S. workers. as a whole. The largest share of Texas’ chart, Page 8). In Texas, Mexican-born
Although labor is Texico’s least-free foreign-born workforce comes from workers make their biggest contribution
market, foreign-born workers have Texico’s southern half. to the Texas economy in construction,
become an important part of the Texas With native Mexicans filling 12 percent accounting for a third of all employment
economy’s success. Immigrants held of jobs, Texas ranked second only to in such trades as drywall installers,
22 percent of the state’s jobs in 2017, California and well ahead of all but a roofers, carpet and tile installers, painters
compared with 17 percent for the nation handful of other states (see Exhibit 4, top and cement masons (see Exhibit 4, bottom
table). Mexican immigrants work in every

Falling Behind other sector—with high employment

shares in manufacturing, agriculture and
EXHIBIT In recent decades, Mexico hasn’t kept pace with the United States or the top
the broad category that includes food-
5 emerging-market success stories in real per capita income (top chart ). At
the same time, Mexico has lost ground to Texas, with the gap in output per service jobs.
employee rising from $22,654 in 1991 to $59,687 in 2017 (bottom chart ). Over the past two decades, Texas added 9
million new residents and created 4 million
jobs—both tops among states. Providing
PPP-Adjusted $2017
$60,000 the homes, offices, stores, factories and
infrastructure to accommodate all these
$50,000 new people and companies without soaring

GDP Per Capita in Selected Countries

real estate prices required a massive building
United States
spree. It’s hard to see how the state could
$40,000
have done it without Mexican workers.
With the state’s unemployment rate
$30,000
at historic lows of around 4 percent, a
South Korea
persistent worry has been the possibility
Chile
$20,000 of labor shortages, particularly in
construction and related industries.
Mexico In Texas, the rapid growth of the past
$10,000 China
quarter century can’t continue unless the
state finds the workers it needs.
$0
1820 1834 1848 1862 1876 1890 1904 1918 1932 1946 1960 1974 1988 2002 2016 Texico offers a large pool of skilled labor
that, if allocated by market forces, could
PPP-Adjusted $2017 Texas
$100,000 meet many of those needs. The migration
data in Exhibit 1, however, point to a
decline in Mexicans coming to Texas, so
$80,000
the Rio Grande still splits Texico’s labor
Output per Employed Worker market in two.

$60,000
Soaring cross-border trade and
investment flows, Mexican workers
helping to build the Texas economy,
Mexico
$40,000 multinationals erasing borders—these
are proof positive of Texico’s increasing
integration. The deepening partnership
$20,000 between Texas and Mexico also shows
up in other ways that are harder to
measure—in particular, supply chains and
$0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 knowledge transfers.

O’Neil Center 2017-18 Annual Report 9

Convergence Conundrum
While Texas and Mexico have been
connecting their economies, they’ve both
also been integrating with the rest of
the world. That’s just the nature of the
process—open to one, open to all.
Globalization has added fuel to a Texas
economy that scores well on just about
every measure of success—GDP growth,
job creation, income gains, innovation,
entrepreneurship, domestic and international
inflows of people and businesses, the list
could go on. Trade policy comes under
Washington’s purview, but
economy fits well with the Texas Model of
economic freedom, which keeps taxes low
and government small to allow the private
sector to compete both at home and abroad.
Mexico’s market-opening reforms rested
on the same philosophy, seeing a path to
prosperity in removing the heavy hand of
government that held down the private
sector. Mexico’s economy went through big
changes in the past three decades, and many
an open of these changes were for the better, but the
new policies didn’t deliver all they promised.
Mexico’s economy tanked just as NAFTA
went into effect in 1994, but it bounced
back and per capita GDP grew at an average
annual rate of 0.9 percent for the next
quarter century. The figure doesn’t match
the years of the Mexican Miracle; it also

B o x 2 B ord e rl a nd s ’ Int e gra ti on

From the Periphery to the Center

It took a long time for Texas and Mexico
to get serious about integrating their
economies. Residents living on both sides
of the Rio Grande might be justified in
wondering why—they’ve been doing it
for generations, sometimes without the
consent of government.
Cultural and familial ties unite border
communities in Texas and Mexico, and
people have routinely made short trips
to another country to shop, work and
socialize. The de facto integration emerged
in simpler times, when economics took
precedence over border security.
border to work on U.S. farms from 1942
to 1964. Mexico’s maquiladora program,
started in 1965, provided incentives to
low-wage manufacturing by allowing duty-
free entry for inputs used to produce goods
sent back to companies on the U.S. side.
Adding Jobs, North and South
Fourteen Texas counties
north bank of the river, but most border
Employment Gains Along the Texas-Mexico Border
1,000,000
Number of Jobs
region economic activity takes place
in four metropolitan areas—El Paso,
Laredo and—in the Rio Grande Valley—
Brownsville and McAllen. On the river’s
south bank are the Mexican states of
Chihuahua, Coahuila, Nuevo Leon
and Tamaulipas, home to many light
manufacturing companies (see map).
Since NAFTA went into effect in
line the 1994, the border region moved from
the periphery of two national economies

The result was an integrated economy

900,000
stradling the 1,254 mile border—a
Texico in microcosm. The Texas side’s 800,000
Manufacturing Employment in the Four
well-being depended on trends in the Mexican States that Border Texas
700,000
Mexican economy, such as the exchange
600,000
rate of the peso. The Mexican side’s
fortunes were tied to the U.S. economy 500,000
Private Employment in the Four Biggest
because many of its factories supplied 400,000 Texas MSAs that Border Mexico
industries north of the border.
300,000
Decades before the broader Texico
emerged, a few policies to promote 200,000
integration helped shape the border 100,000
region’s economy. The U.S. bracero
0
program welcomed Mexicans across the 1990 1995 2000 2005 2010 2015

10 O’Neil Center 2017-18 Annual Report

trails the United States (1.5 percent) and
the modern era’s most successful developing
economies. From 1993 to 2017, per capita
GDP grew by 4.0 percent a year in South
Korea, 3.1 percent in Chile and 8.7 percent
in China (see Exhibit 5, top chart, Page 9).
Economics sees integration as an agent for
convergence—the poorer side growing faster
and gaining ground on the richer one. Not so
in Texico; Mexico has slipped farther behind
its neighbor since 1991. Output per worker,
to the center of an emerging North
American market. Big changes followed.
Tarriff cuts and the breakdown of other
economic barriers took away some of
the advantages of producing just south
of the Rio Grande, effectively ending
the maquiladora program. Factories
moved inland, but many companies also
climbed up the value chain to higher-
value products.
When producing goods, being close to
the United States still pays off. Since 1990,
manufacturing employment in the four
Mexican states abutting Texas tripled to
900,000 workers, well ahead of Mexico’s
overall job growth (see chart left).
There’s also been growth on the Texas
side, where agriculture and services drive
the economy. Employment in the four
large metropolitan areas doubled to more
than 630,000 workers since 1990, more
or less in line with the performance of the
rest of the state.
Still a Busy Border
Crossing the border isn’t as easy as it
once was. Since the 1980s, the United
has been flat at around $40,000 for Mexico,
while it rose from $60,000 to $100,000 in
Texas (see Exhibit 5, bottom chart).
Statistics like these aren’t the end of the
convergence story. We can also look at some
direct evidence of relative living standards.
In Texico, gaps between
household ownership of basic and
durable goods have been closing
for decades. Mexico now nearly
matches the United States in the
El Paso
Chihuahua
Coahuila
Nuevo Leon
States has been tightening border security
in an effort to deter illegal immigration
and drug smuggling—stepping up money
and manpower after the September 11,
2001 terrorist attacks. Annual Texas
crossings by pedestrians and travelers in
passenger cars, busses and trains have
fallen sharply in the past two decades—
from 163 million in 1999 to 86 million
in 2017.
By contrast, comercial traffic is bustling
like never before, largely because of
the dynamism generated by Texico. In
2017, more than 3.3 million loaded
truck containers and 467,750 loaded
rail containers moved across the Texas-
Mexico border. Among the 11 ports of
entry along the Rio Grande, Laredo leads
the way—it’s the nation’s second busiest
share of households with electricity and
color televisions (see Exhibit 6, top chart,
Page 12). Mexicans have also been catching
up in ownership of some household goods,
such as washing machines and refrigerators.
The share of Mexican homes with complete
indoor plumbing has been rising
steadily toward U.S. levels. Air-
conditioning shows no gains.
Convergence seems to be delayed
Rio Grande
Laredo
McAllen
Brownsville
Tamaulipas
customs district for exports and third
busiest for imports.
Combining the movement of truck and
rail containers yields shows the stunning
incease in the border region’s commercial
traffic. The total tripled from 1.3 million
containers in 1996 to 3.9 million in 2017.
Unless ill winds from Washington or
Mexico City undercut Texico, the border
region should remain central to the
deepening integration of the Texas and
Mexico economies. Northern Mexico will
continue its orientation toward the needs
of the U.S. market, and South Texas will
continue to be the part of the state with
the closest ties to Mexico.
O’Neil Center 2017-18 Annual Report 11
for some products. The gap in automobile
ownership only began to shrink in the past
Slow to Converge
five years or so. Mexican households were
E X HIB IT Mexico has been catching up with the United States in household ownership of

late in buying many popular technology 6 some basic services and durable goods (top chart ). The gap between the two
countries in computers, mobile phones and other digital goods widened in the
products (bottom chart). The catch-up
1990s and only began to close in the past decade or so (bottom chart).
didn’t begin until the early 2000s for
computers, mobile phones and Internet 1977 1982 1987 1992 1997 2002 2007 2012 2017
0
access. Smartphones made their first gain
just a few years ago, and laptops are still -10
losing ground. Electricity
-20
Mexico achieved some convergence, Washing Machine
Color TV Refrigerator
but why hasn’t it been faster? First off, -30
the United States and the other highly -40
successful economies kept a good pace Complete Indoor Plumbing
in running ahead, making it harder for -50
Automobile
Mexico to catch up. It’s possible to find -60
countries—and even some U.S. states—
-70
that haven’t performed as well as Mexico.
Air Conditioning
The goal of the market opening, of course, -80
Household Ownership of Durable Goods—Mexico Minus U.S.
wasn’t to converge with Argentina.
A second point centers on the nature 1977 1982 1997 2007 2017
1987 1992 2002 2012
of economic transitions. Economies don’t 0

turn at the snap of a finger—or the signing -10

of a NAFTA-like trade deal. It takes time Laptop Smartphone
-20
to unwind existing economic structures
and shift resources from less competitive -30
sectors to more competitive ones. Mobile Phone
-40 CD Player
History shows that countries that Microwave Oven Computer Internet
throw off their import substitution -50

strategies don’t usually do it all at once -60

and rarely get immediate and unequivocal
success. South Korea, Chile and China all
got off to slow starts after opening their
economies—but they stuck with it and
reached their sweet spots for growth.
The strategy for market opening,
moreover, might involve a deliberate
gradualism to ease transition costs or
sway powerful interests that might oppose
the new policies. For example, NAFTA
compromised on free trade with provisions
to protect the turf of the Mexican
telecommunication and energy industries
and U.S. trucking companies. When
countries leave reforms incomplete, delay
them or backslide, existing inefficiencies
-70
-80
Household Ownership of Durable Goods—Mexico Minus U.S.
persist, slowing the transition to a freer foreign participation and degrades
and more efficient economy. economic performance.
A third reason that market-opening The factors favorable to integration
initiatives falter—more toxic than are summed up in the term economic
the others—involves institutions and freedom, and economists have been
governance. Integration does best with measuring it for decades, first for nations
a social infrastructure that includes such and later for North American states and
things as respect for private property, provinces. Since 1990, Economic Freedom
effective administration under the rule of the World (EFW) scores have risen for
of law, transparent regulation and sound Chile, South Korea and China, the three
money. Failure to maintain these virtues nations growing faster than Mexico (see
undermines confidence, discourages Exhibit 7, below). The readings suggest a

12 O’Neil Center 2017-18 Annual Report

steady commitment to market opening. upward (dotted black line). In the past
Texas’ policies pass muster, too. The decade, however, the measure began to
Economic Freedom of North America decline sharply—an ominous sign.
(EFNA) report indicates there’s little Before the reforms of the 1980s,
to worry about in Texico’s north, with corruption and cronyism beset Mexico’s
“Corruption, cronyism
Texas consistently among the Top Five economy. Recent years’ declining all-
U.S. states in economic freedom and the and rising violence government scores suggest old ways have
United States among the freest countries. go a long way crept back into the system, perhaps not as
Texico’s south is another matter. much with the central government as with
Looking just at national policies, the EFW
toward explaining state and local authorities. Mexican states
report indicates that Mexico’s economic why Mexican growth differ quite a bit in economic freedom, but
freedom, while low by U.S. standards, in too many places corruption has allowed
and income haven’t
increased from 1990 to 2006; after that, drug cartels to operate with relative impunity,
it declined for a few years before starting converged with the bringing waves of fear and violence.
to rise again (solid black line). Reports from Mexico and the
United States.”
Mexico’s overall gain in the 25-year work of independent anti-corruption
period didn’t match the performances organizations also point to the country’s
of Chile, South Korea and China, The rest of the story lies in what’s continuing struggles. Transparency
suggesting Mexico wavered somewhat in happening with Mexico’s state and local International (TI), for example, ranked
implementing its reforms, most likely to governments. From 1990 to 2016, the Mexico 135th in the world in 2017—with
appease domestic interests. EFNA all-government index, which looks a corruption-perception score even lower
An occasional waver or delay on a policy, at economic freedom across all jurisdictions, than what TI reported two decades ago.
of course, isn’t likely to stall convergence. followed the national government’s line Corruption undermines public faith in the
rule of law. It rots an economy from within,
Faltering Economic Freedom sapping the effectiveness of policies that

E XH IBIT With policy reforms, Mexico’s economic freedom score for national government support economic freedom and integration.
Other factors like low levels of education
7 rose after 1990 (black line )—other emerging countries had larger gains.
When state and local governments are included, Mexico’s all-government shouldn’t be ignored, but the ongoing
economic freedom declined in the past decade (dotted black line ). plague of corruption, cronyism and rising
violence go a long way toward explaining
Index of Economic Freedom
8.0 why Mexican growth and income haven’t
Chile converged with the United States or kept
pace with the likes of Chile, South Korea
7.5
South Korea and China.

7.0 Mexico (National Government Only) Texico at a Crossroads

6.5 Mexico’s market opening wasn’t designed

China
or executed well enough to put the economy
on the fast track and deliver a quick
6.0 Mexico (All Levels of Government) convergence. Does that mean the policies
have failed and Mexico ought to try another
5.5 wrenching turn in economic strategy?
Texas counts its blessings from closer
economic ties to Mexico, but other places
5.0
1990 1995 2000 2005 2010 2015 in the United States view trade as more

O’Neil Center 2017-18 Annual Report 13

burden than blessing, with Mexico a
frequent bogeyman. Should America turn
to trade barriers in an effort to protect jobs?
Questions like these aren’t new, of
course, but now those in power seem to
be asking them. In a nutshell, that’s the
reason why Texico unexpectedly faces an
uncertain future. It’s not the economics,
nor current policy, it’s the politics and
what they bode for the future.
Since he began running for president,
Donald Trump has been hostile to Mexico,
Knowledge transfers are a prime benefit
of an open economy. NAFTA, for example,
opened Mexico to U.S., European and
Asian automobile companies, giving
a generation of Mexican workers and
managers hands-on experience in modern
manufacturing methods. San Antonio-
based grocer H-E-B, Walmart, Costco,
Starbucks and dozens of other U.S. fast-
food and specialty stories exposed Mexico
to U.S. retailing practices and strategies.
Led by Houston-area firms, Texas is on
the cutting edge of energy technology, and
it could teach Mexico a great deal about
oil exploration and production—and new
policies just might provide the opportunity.
Nationalization of the oil industry in
1938 gave state-owned Petroleos Mexicanos
(Pemex) a monopoly on the exploration,
production and distribution of petroleum
products. Mexico clung to it in NAFTA
negotiations, and foreigners remained
prohibido for the next two decades.
Without foreign partners
competitors, Pemex became bloated,
bureaucratic and backward. Oil output
fell from almost 3.5 million barrels a day
in 2004 to less than 2 million barrels
in 2017—with no sign Pemex could
engineer a revival (see chart right).
14 O’Neil Center 2017-18 Annual Report
threatening to blockade the
behind a border wall and pull out of
NAFTA. He’s been willing to engage in
trade brinkmanship by threatening to raise
tariffs. Rather than pull out of NAFTA,
Trump opted to renegotiate the pact with
Mexico and Canada. In late August, the
United States and Mexico reached the
framework for a new NAFTA deal—but its
fate will depend on politics and how events
play out over the next few months.
In 2018, Mexican voters added to
Box 3 O i l Prod uct i on
To Frack or Not to Frack
A quarter century before Mexico’s peak,
Texas’ oil production was seemingly in
terminal decline, going from 2.5 million
barrels a day in 1981 to less than 1.1
million in 2009. After that, the industry
bounced back the American way—through
innovation and entrepreneurship.
Led by George Mitchell’s operations
in the Barnett Shale outside Fort Worth,
the industry found that a combination of
hydraulic fracturing and horizontal drilling
could coax huge amounts of oil and gas from
shale formations. As the frackers ramped up
operations and refined their techniques,
1000s barrels/day
4000
3500
3000
2500
2000
or 1500
1000
500
0
1981 1986 1991
country Texico’s uncertainty by voting to elect
populist Andres Manuel Lopez Obrador,
who will take office in December. The
president-elect has been cryptic about
whether he intends to keep Mexico open
for business or veer toward the economic
nationalism he espoused earlier in his
political career. One of Obrador’s first
orders of business after being sworn in
may be deciding what to do with the
updated NAFTA deal.
Will either or both of these leaders try
Texas oil output rebounded to more than
3.5 million barrels a day in 2017.
Recognizing the need for investment
and expertise to reverse the decline in
oil output, Mexico opened its industry
to foreigners and private companies
in 2014. In a series of auctions, the
country sold dozens of leases to
foreign companies, mostly for off-shore
exploration in the Gulf of Mexico.
New reserves have already been found,
but Mexico has so far shied away from
ventures for fracking, despite the record
for boosting oil production in Texas.
Mexico
Texas
Fracking begins to
spread in Texas
1996 2001 2006 2011 2016
to make the Rio Grande into what it was
30 years ago—an economic boundary
as well as a physical one? No place has a
bigger stake in what happens than Texico,
where decades of expanding cross-border
business created a large constituency for
open trade and investment. Supporters on
both sides of the border proclaim, often
and loudly, that the best course lies in
allowing integration to continue, perhaps
with a little NAFTA fine-tuning.
The gains from trade and investment
already realized make a strong case for
maintaining the connections across the
border. Looking to the future makes
the case even better because of the vast
untapped potential for business in Texico,
especially if Mexico reverses the erosion of
its economic freedom.
Take a quick look at energy. Mexico’s oil
output peaked a decade ago, prompting the
country to open a long-closed industry to
foreigners (see Box 3, Page 14). Meanwhile,
innovation and entrepreneurship reversed
the decline in Texas’ oil production and
sent it soaring to record heights.
The synergies are obvious and just
starting to kick in. To Texico’s south,
there’s an oil-rich country with a land
mass three times greater than Texas and
a coastline nearly 16 times as long. To
Texico’s north, there’s a state with world-
class expertise in oil exploration and
“Will either or both of
these leaders try to
make the Rio Grande
into what it was
30 years ago—
an economic
boundary as well
as a physical one?”
production and a track record of success
around the world. The payoff could be
enormous on both sides of the border.
Beyond the oil sector, opportunities
abound. Goods now dominate Texico
trade, but the No. 1 country in services
exports starts just north of the Rio
Grande. What Texico north and south
did for automobile supply chains could be
extended to other industries. Texas and
Mexico firms could combine their talents
to penetrate export markets in places like
Europe, Asia and South America. Led by
builders and landscapers, Texas employers
worry about labor shortages while willing
workers wait in Mexico. With changes in
immigration laws, benefits would flow to
both parts of Texico.
Before gaining real momentum, the
integration of the Texas and Mexico
economies had to wait for the moment
that both economics and policy were
right. The challenge for the future lies in
keeping them right.
The outlook couldn’t be brighter on
the economics because of the myriad
connections made in the past three
decades and the potential for so many
more. The uncertainty lies in policy—
or rather politics. In the short term,
Texico’s businesses will be looking to the
completion of the NAFTA negotiations for
signals on how the current political mood
will impact integration’s standing.
Perhaps Trump and Obrador will decide
that the best course lies in expedient
practicality—recognizing the fact that
Texico built a large constituency because
both sides recognize it works better than the
alternative of economic nationalism. If these
two leaders can see that, the businesses of
Texas and Mexico can take it from there—as
they’ve been doing for three decades.
W. Michael Cox is founding director of
the William J. O’Neil Center for Global
Markets and Freedom (wmcox@smu.edu).
Richard Alm is writer in residence at the
center (ralm@smu.edu).

Notes and Data Sources

The authors would like to thank José Torra, Roberto Salinas León
and the Mission Foods Texas-Mexico Center at SMU for their help
with this project.
Exhibit 1: Slow to Gain Traction
Historical Statistics of the United States: Millennial Edition,
U.S. Census Bureau, U.S. Department of Commerce; Statistical
Abstract of the United States, U.S. Census Bureau, U.S.
Department of Commerce, available at census.gov; Federal
Reserve Bank of St. Louis, FRED data retrieval system, available
at fred.stlouisfed.org; Bureau of Economic Analysis, U.S.
Department of Commerce, available at bea.gov; Yearbook of
Immigration Statistics, Office of Immigration Statistics, Department
of Homeland Security, available from dhs.gov; Statistical Abstract
of the United States, U.S. Census Bureau, U.S. Department of
Commerce, available from census.gov. U.S.-Mexico trade is for
merchandise only. Data for 1820 to 1979 are estimated on the
basis of total immigration from Mexico to the U.S. in those years
and later-year statistics on the share of Mexican immigrants to the
U.S. whose state of intended residence is Texas.
Continued next page

O’Neil Center 2017-18 Annual Report 15

Box 1: Mexico and Texas, By the Numbers
Geographic Terms and Concepts, Census 2000 Geography
Glossary, U.S. Census Bureau, U.S. Department of Commerce,
available at census.gov; World Development Indicators
Databank, The World Bank, available at http://databank.
worldbank.org; OECD Main Economic Indicators, Organization
for Economic Cooperation and Development, available at
https://stats.oecd.org/; Bureau of Economic Analysis, U.S.
Department of Commerce, available at bea.gov; American
Community Survey, U.S. Census Bureau, U.S. Department
of Commerce, available at https://factfinder.census.gov;
Euromonitor International; Credit Suisse Global Wealth Report
2017, Credit Suisse Research Institute, available at credit-
suisse.com; Zillow Group, available at zillow.com; Bureau of
Labor Statistics, U.S. Department of Labor, available at bls.gov;
UNESCO Institute for Statistics, available at http://data.uis.
unesco.org; Statistical Abstract of the United States, U.S. Census
Bureau, U.S. Department of Commerce, available at census.gov;
The World Factbook, U.S. Central Intelligence Agency, available
at cia.gov.
Exhibit 2: Trade Among Neighbors
U.S. Census Bureau, U.S. Department of Commerce, available at
census.gov; Instituto Nacional de Estadística y Geografía, Secretaría
de Hacienda y Crédito Público de México, available at inegi.org.
mx. Data are for merchandise trade only.
Exhibit 3: Open for Business
Historical Statistics of the United States: Millennial Edition, U.S.
Census Bureau, U.S. Department of Commerce; Statistical Abstract
of the United States, U.S. Census Bureau, U.S. Department of
Commerce, available at census.gov; Selected Data on Foreign
Direct Investment in the United States, 1950-79, Bureau of
Economic Analysis, U.S. Department of Commerce, December,
1984, available at https://fraser.stlouisfed.org; The Maturing of
Multinational Enterprise, Mira Wilkins, Harvard University Press,
Cambridge, MA, 1974; Survey of Current Business and online
data, Bureau of Economic Analysis, U.S. Department of Commerce,
available at bea.gov.
16 O’Neil Center 2017-18 Annual Report
Exhibit 4: Working for Texas
American Community Survey, U.S. Census Bureau, U.S.
Department of Commerce, available at https://factfinder.census.
gov. Data are for 2015.
Exhibit 5: Falling Behind
Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar,
Herman de Jong and Jan Luiten van Zanden (2018), available at
ggdc.net/maddison; World Development Indicators DataBank, The
World Bank, available at http://databank.worldbank.org; Bureau of
Economic Analysis, U.S. Department of Commerce, available at bea.
gov; Bureau of Economic Analysis, U.S. Department of Commerce,
available at bea.gov; World Development Indicators Databank, The
World Bank, available at http://databank.worldbank.org.
Box 2: Borderlands’ Integration
Bureau of Labor Statistics, U.S. Department of Labor, available at bls.
gov; Instituto Nacional de Estadística y Geografía, Secretaría de
Hacienda y Crédito Público de México, available at inegi.org.mx.
Exhibit 6: Slow to Converge
World Development Indicators Databank, The World Bank, available
at http://databank.worldbank.org; Instituto Nacional de Estadística
y Geografía, Secretaría de Hacienda y Crédito Público de México,
available at inegi.org.mx; Euromonitor International, available at
euromonitor.com; W. Michael Cox and Richard Alm, “Onward and
Upward: Bet on Capitalism—It Works,” 2015-16 Annual Report,
O’Neil Center for Global Markets and Freedom, Cox School of
Business, Southern Methodist University, available at oneilcenter.
org; Bureau of Economic Analysis, U.S. Department of Commerce,
available at bea.gov.
Exhibit 7: Faltering Economic Freedom
Economic Freedom of the World: 2017 Annual Report and Economic
Freedom of North America 2017, Fraser Institute, available at
fraserinstitute.org.
Box 3: Oil Production
U.S. Energy Information Administration, U.S, Federal Statistical
System, available at eia.gov.
 2017-18: Ye a r in R e v ie w
The O’Neil Center’s headline event for the
2017-18 academic year was a packed house
for a speech by renowned economist Walter
Williams, who warned that government
growing bigger and more powerful posed a
danger to individual liberty (see box right).
Before and after that October evening,
our scholars published almost 50 articles for
academic and general interest publications,
and delivered nearly 70 speeches,
presentations and lectures. They produced
new data on economic freedom.
In addition to Williams’ speech, the
center’s public events included lectures
by five distinguished scholars, and the
Texas Economic Forum discussed DFW’s
innovation economy in the fall and the
impacts of President Trump’s policies on the
state economy in the spring.
The center’s Annual Report essay explored
the long-run interaction of technology and
economic progress, with the goal of helping
readers better understand today’s upheavals
and angst. Teaching Free Enterprise in
Texas, a program providing instruction
and curriculum materials to improve
economic education in high schools, had
its biggest year ever with more than 1,000
teachers attending workshops, plus six new
curriculum units.
O’Neil Center professors taught over
700 students in SMU classes, with 72
more attending the center’s six reading
groups. The Workshop Series for academics
featured seven presentations of research in
progress. In the spring semester, the center
began commemorating the 10th anniversary
of its founding (see inside back cover).
Recognition of the 10-year milestone will
continue in the fall semester.
Williams’ speech took the place of the
O’Neil Center’s annual conference, which
for eight years had brought together well-
known economists, authors and business
leaders to discuss current issues within a economies are rich and growing rapidly
framework of economic freedom. In the while others are poor and growing slowly.
upcoming academic year, the conference will To this end, it fosters an understanding
return. Before the end of May, the center of economic freedom among students,
had already received commitments from policymakers and the general public. We’re
speakers, including Nobel laureate Vernon the only research institute with expertise in
Smith, for a September program on the measuring economic freedom at all three
“Ethical Conundrums of Capitalism.” levels of economic analysis—national, state
The O’Neil Center studies why some and metropolitan areas.
A Free-Market Icon at SMU
Walter Williams began with a few data points on the growth of public spending and
taxing over the past century. The George Mason University professor said these numbers
showed that government had expanded far beyond its legitimate functions, such as
national defense, policing, adjudicating disputes and providing true public goods.
Williams told an audience of nearly 500 people at SMU’s Hughes-Trigg theater
exactly what he saw in this bigger government—a threat to individual liberty. “The
ultimate end of this process, ladies and gentlemen, is totalitarianism and tyranny.”
“I am not saying we are a totalitarian nation yet,” he continued. “But if you ask the
question, ‘Which way are we headed tiny steps at a time? Are we headed toward more
personal liberty or are we headed toward more government control over our lives?’ It
would almost unambiguously be the latter. And remember, if you take tiny steps toward
any goal, you’re sooner or later going to reach it.”
Williams conceded that government grows out of people’s desire to do good—
to help, for example, the poor or elderly. Yet, government has no resources of its
own, and political leaders in Washington and state capitals don’t reach into their
own pockets when trying to do good. “The only way the government can give one
American $1 is through coercion, threats and intimidation to confiscate that dollar
from some other American.”
O’Neil Center 2017-18 Annual Report 17
Robert Lawson Albert W. Niemi
The center relies primarily on donors
to fund its operations. With an annual
budget of over $2 million, the center
is grateful for the generous support of
the William E. Armentrout Foundation,
McLane Company, Inc., the Charles G.
Koch Charitable Foundation, the William J.
O’Neil Foundation, the Deason Foundation,
Richard W. Weekley, Tucker Bridwell and
numerous other individual donors.
The O’Neil Center’s staff remained
unchanged—with one exception. Managing
director Derek Yonai left in October to
become the director of the Koch Center
for Leadership and Ethics at Emporia State
University. Meg Tuszynski, who joined
the center in 2016 as a research associate,
was promoted to faculty rank and replaced
Yonai, with the title of assistant director.
In addition to Tuszynski, the O’Neil
Center finished the academic year with:
Robert Lawson, the Jerome M.
Fullinwider Centennial Chair in Economic
Freedom, completed his third year as
director;
Al Niemi, the William J. O’Neil Chair
in Global Markets and Freedom, stepped
down as SMU Cox dean, returning to
teaching and research as a member of the
Michael Davis Ryan Murphy
18 O’Neil Center 2017-18 Annual Report
W. Michael Cox Dean Stansel
center in August 2017;
W. Michael Cox, founding director of
the O’Neil Center, led the Texas Economic
Freedom initiative and co-authored the
center’s Annual Report essay;
Dean Stansel, research associate
professor, co-authored the Economic
Freedom of North America (EFNA) report
and led student reading groups;
Richard Alm, writer-in-residence,
collaborated with the Cox on the Texas
Economic Freedom initiative and Annual
Report essay;
Mike Davis, senior lecturer, once again
shouldered the center’s heaviest teaching
load and was a versatile and quotable
resource for local TV and other media;
Ryan Murphy, research assistant
professor, primarily worked with Lawson
on economic freedom research and led the
center’s advanced reading group;
Daniel Serralde, economic education
coordinator, continued to expand the
Teaching Free Enterprise in Texas program;
Program specialist Liz Chow assisted
with logistics and marketing of the center’s
events and initiatives;
Dwight Lee continued his affiliation
with the O’Neil Center as a Senior Fellow,
visiting the SMU campus twice during the
academic year and using his SMU affiliation
Daniel Serralde Liz Chow
Richard Alm Meg Tuszynski
for his writings and other professional
activities. Lee decided to retire fully at the
end of the 2017-18 academic year.
This Review reports on the center’s
activities and accomplishments for the
academic year that began on June 1, 2017,
and ended on May 31, 2018. It starts with
the center’s three mutually supporting
research agendas:
• Global Economic Freedom, which
concentrates on measuring economic
freedom and its impact on key metrics of
national performance;
• Economic Freedom of North
America, which takes a similar approach
to studying state and metropolitan-area
economic freedom;
• Texas Economic Freedom, which studies
Texas and its largest cities, all of which rank
highly in economic freedom and outperform
the rest of the nation on key metrics.
These three research agendas support the
O’Neil Center’s fourth initiative: Student
Enrichment and Public Outreach. The
O’Neil Center spreads the ideas of liberty
and economic freedom to SMU students
in classrooms and reading groups and to
the broader community through public
programs and the media.
Dwight R. Lee Derek Yonai
 Global Economic Freedom
Global Economic Freedom addresses the O’Neil Center’s founding mission with research on why economies succeed and fail. Its
centerpiece is The Economic Freedom of the World (EFW) report, an empirical measure that gives researchers a powerful tool to test
ideas about free enterprise and its consequences. Studies find that high EFW scores correlate with higher incomes, faster economic
growth, lower poverty rates, higher life expectancy and many other positive outcomes.

EFW Report
Lawson has been a key researcher on the EFW index for over two decades. At the O’Neil Center,
he and Murphy compile the EFW data and calculate economic freedom ratings for 159 countries.
Released in September 2017, the latest EFW report by Lawson and co-authors James Gwartney
and Joshua Hall showed that the most economically free places in the world were Hong Kong,
Singapore, New Zealand, Switzerland and Ireland.
Regarding the United States, the report found a slight uptick in its economic freedom score,
pushing the country from 13th place in 2014 to 11th place in 2015. The United States ranked
highly in sound money and labor market regulation. Its lowest ranking was in size of government
Lawson gave public lectures on the EFW index and its implications at Ball State University,
University of North Carolina Wilmington, Mackenzie University in Brazil, Oklahoma State
University and Samford University. Cover of EFW, 2017

The Imagination Age

The 2016-17 annual report was the eighth in
a series that began in 2009. After reading the
essay, Dean Matt Myers of SMU Cox wrote: Cox
and Alm “urge us not to forget the past—that
the arrival of new ages has always brought pain
and progress.”
The center’s Annual Report essay addressed the job losses and income inequality
that challenge many Americans’ faith in capitalism. Written by Cox and Alm, “The
Imagination Age: America’s Fourth Wave of Economic Progress” tied today’s angst to
a fundamental transformation of the U.S. economy, brought on by the arrival of digital
technologies, particularly the Internet.
The country endured previous periods of rapid economic change, the essay noted.
The first came after the Civil War, when new technologies turned an agricultural
economy into an industrial one. Then in the 1970s a new wave of technologies began
to erode the industrial economy, ushering in the Information Age.
Today, the arrival of another new age is disrupting the foundations of the existing
economy—from the skills workers need to the goods and services available to consumers.
These disruptions are causing today’s dislocations and hardships, but they’re part of a
capitalist economy’s orderly progression toward higher living standards.
Cox and Alm identify the economic logic of shifts from one age to the next. “At any
point in history, a key scarce resource limits basic living standards,” they wrote. “Some
binding constraint keeps the resource in short supply and expensive, and societies can’t
rise until a breakthrough technology comes along. What was once scarce and costly
becomes plentiful and cheap.”
Earlier ages ended when machine power started making food cheaper and when
the microchip started making information cheaper. It’s now relatively cheap to store,
process and transmit ideas. The next scarce resource is the ability to imagine what to do
with a wealth of knowledge—thus the Imagination Age.

O’Neil Center 2017-18 Annual Report 19


In “Taxation in the Classical Liberal
Tradition,” published in the Review of
Austrian Economics, Lawson and J. R.
Clark urged classical liberals to take more
seriously problems of market failure
associated with externalities and public
goods. This paper was based on Lawson’s
May 2017 talk at the Mont Pelerin Society
meeting in Seoul.
Lawson and Murphy wrote “Economic
Freedom and Growth Specification Debate:
A Retrospective” for Applied Economic
Letters. The paper takes a fresh look at a
10-year-old debate on the best way to use
the EFW index in regressions.
The Cato Journal published “Extending
the Economic Freedom of the World Index
to the Cold War Era,” written by Lawson
and Murphy. They take the EFW back two
decades to 1950 for major countries.
In addition to his articles with Lawson,
Murphy published “Aggregate Demand
Shortfalls and Economic Freedom” in the
Review of Austrian Economics (with Taylor
Leland Smith). The paper found restrictive
monetary policy might undermine
economic freedom through the election of
populists.
Economic Affairs published “U.S.
Immigration Levels, Urban Housing
Presentations and Speeches
Lawson and Ben Powell, director of
the Free Market Center at Texas Tech
University, presented a May seminar at
George Mason University’s Mercatus
Center on their forthcoming book titled
Socialism Sucks: Two Economists Travel the
Unfree World.
Lawson spoke on his study of the pro-
market economic reforms in the country
of Georgia at Utah State University,
University of North Carolina Charlotte,
20 O’Neil Center 2017-18 Annual Report
Academic Publications
Values, and their Implications for Capital
Share,” an article written by Murphy and
Alex Nowrasteh.
Working with Colin O’Reilly, Murphy
wrote two papers on the relationship between
the discovery of economically important
natural resources and economic freedom—
“Exogenous Resource Shocks and Economic
Freedom” in Comparative Economic
Studies and “Do Institutions Mitigate the
Risk of Natural Resource Conflicts?” in
Contemporary Economic Policy.
Murphy and Lee joined forces to
consider the implications of disenchanted
voters in a Public Choice article titled “An
Expressive Voting Model of Anger, Hatred,
Harm and Shame.”
Murphy contributed “Immigration and
Its Effects on Economic Freedom: An
Empirical Approach” to the Cato Journal’s
theme issue reviewing economic research
on immigration and the economy. Murphy
focused on how the arrival of foreigners
changed institutions.
Libertas: Segunda Epoca published
“A Call for Out-of-Sample Testing in
Macroeconomics” by Murphy and Robert
Gelfond, who recommend the methodology
while pointing out it has very rarely included
a government spending multiplier.
Oklahoma State University, West Virginia
University and Texas Tech.
At April’s Association of Private
Enterprise Education (APEE) meeting in
Las Vegas, Lawson presented new research
on the determinants of economic freedom.
At July’s annual FreedomFest, held in Las
Vegas, Lawson represented the O’Neil
Center as an exhibitor and served on a
panel about the EFW index.
Lawson met with other scholars working
The Independent Review ran Murphy’s
“The Best Cases of Actually Existing
Socialism,” which looked at the more
functional systems in Hungary, Israel
and China and found that these countries
eventually retreated from socialism
by liberalizing. Murphy responded to
comments from Mike Munger of Duke
University in a subsequent issue of the
Review.
Tuszynski and Murphy explored the
topic of “Aging Populations and the Size of
Government” in the Institute for Research
in Economic and Fiscal Issues’ Working
Paper No. 201802.
In Public Choice, Lee and J.R. Clark
published a critique of an emerging
branch of economic research, titled
“Can Behavioral Economists Improve
Economic Rationality?”
Lee’s “Voting with Your Ballots versus
Voting with Your Feet” was the featured
article on the Library of Economics and
Liberty site on February 5.
Murphy summarized the recent effort to
improve the EFW index in “New Changes
for Economic Freedom of the World,”
which appeared in the Mustang Business
Journal, an on-line publication by SMU
Cox students.
on the EFW index at the Economic
Freedom Network meeting in Kiev,
Ukraine. On the trip, he lectured at Tbilisi
State University, Black Sea International
University and Gori State University.
In May, Lee gave a series of talks at
Universidad Francisco Marroquin in
Guatemala City. With groups of students
and professors, he discussed his research
Continued next page
with Murphy on “An Expressive Voting
Model of Anger, Hate, Harm and Shame.”
Lee also spoke on “The Moral Appeal of
Government Action” and “Making the
Case for the Market: Overcoming a Moral
Misunderstanding.” At the graduation
ceremony, the university gave Lee an
honorary doctorate.
Lee also discussed the findings of
“An Expressive Voting Model of Anger,
Hatred, Harm and Shame” at the Public
Choice Society Meeting and a faculty
seminar at the University of Georgia.
At the SMU Summer Economics
Conference, Lee took up a provocative
State and Metro Economic Freedom
Since 2013, Stansel has been the primary author of the Economic Freedom of North America (EFNA) report, a
data-driven assessment of the balance between markets and government control in each of the continent’s states
and provinces. Stansel also created the first index that measures economic freedom for the nation’s 380-plus
metropolitan statistical areas (MSAs).
In December, Stansel and co-authors
Jose Torra and Fred McMahon released
EFNA’s 2017 report. At the top of the
U.S. list—the most economically free
states—were New Hampshire, Florida,
Texas, South Dakota and Tennessee.
At the bottom of the list, exhibiting the
least amount of economic freedom, were
New York, California, New Mexico, West
Virginia and Hawaii.
The latest EFNA results were grist for
several newspaper columns. In December,
Stansel’s “New York, California Are Rock
Bottom on Economic Freedom—Again”
appeared in Investor’s Business Daily.
The next month, Stansel and Orphe
Divounguy wrote “The Incredible
Shrinking of Illinois: High Taxes and Low
Economic Freedom Have Led to State
Crisis” for The Daily Caller.
question: “Are Economists Evil?”
“Can Behavioral Economists Improve
Economic Rationality?” was the topic for
two of Lee’s talks, one at the Southern
Economic Association meeting in
November and the other at the APEE
conference in April. At APEE, Lee made a
presentation titled “Did Nancy MacLean
Read any of Buchanan’s Work?”—a
discussion of the controversy started by
a recent book on Nobel Prize-winning
economist James Buchanan.
Murphy presented a paper titled “The
State Economic Modernity Index: An Index
of State Building, State Size and Scope,
EFNA Report
EFNA grew out of EFW work.
and State Economic Power” at an August
American Institute for Economic Research
conclave in Great Barrington, Mass. In the
fall, he presented the paper at George Mason
University, Creighton University and the
Southern Economic Association meeting.
Murphy’s visit to Creighton also
included a talk to undergraduates on
“Cross-Country Measures of Institutions
in Academic Research.”
At the Public Choice Society annual
conference in Charleston, S.C., Murphy
made a presentation on “The Long Run
Effects of Government Ideology on
Economic Freedom.”
In “Americans are on the Move to
Freer Pastures,” published in January in
the Washington Examiner, Stansel and
Tuszynski used moving company data to
show that people are relocating to states
with greater economic freedom.
In the spring semester, Stansel
completed a revision of the metropolitan
area economic freedom index, which uses
nine variables to rank 382 local economies
on government spending, taxes and labor-
market restrictions.
In the updated version, Stansel used
more recent data, but he also extended
the measurement back in time to 1972.
The new and improved U.S. Metropolitan
Area Economic Freedom Index will be
published as a Reason Foundation Policy
Study in the fall and be available to
researchers shortly thereafter.
O’Neil Center 2017-18 Annual Report 21
 Academic Publications
Stansel and Tuszynski compiled a comprehensive review of have been rebounding from recession by siphoning jobs from
empirical research articles on state-level economic freedom, elsewhere rather creating new ones;
which will be published as “Sub-national Economic Freedom: A • “A Short Empirical Note on State Misery Indexes” in the Journal

Review and Analysis of the Literature” in the Journal of Regional of Regional Analysis & Policy took advantage of newly available data
Analysis and Policy. on state-level inflation to calculate misery indexes by state;
The two O’Neil Center authors examined the extent to which • “U.S. Immigration Levels, Urban Housing Values and

economic development incentives might lead to an uptick of failing Their Implications for Capital Share” (with Alex Nowrasteh) in
companies in “Targeted Business Incentives and Firm Deaths,” Economic Affairs found only a few communities where increases
which has been submitted to the Review of Regional Studies. in the foreign-born population play a role in explaining higher
housing prices.

Economic freedom and other state-level issues were central to

five of Murphy’s articles:
• “Economic Freedom of North America at State Borders” in the
Journal of Institutional Economics used data for counties on either
side of state borders to gauge the impact of economic freedom;
• Both “Beggaring Thy Neighbor at the State and Local Level”
in the Journal of Financial Economic Policy and “Valuing the
Government Spending Multiplier: Why Monetary Offset Must
Be Recognized” in Mercatus on Policy assessed whether states
Stansel published “An Exploratory Empirical Note on the
Relationship between Labor Market Freedom and the Female
Labor Force Participation Rate in US Metropolitan Areas” (with
Crystal Wong) in Empirical Economics Letters.
The research found that areas with greater labor market freedom
tend to have higher labor-force participation rates among female
workers, suggesting women may be disproportionately harmed
by state interventions in labor markets.

Presentations and Speeches

For a third straight year, the O’Neil
Center hosted the Economic Freedom of
North America conference in June, which
brought together the scholars from three
countries to discuss the EFNA index and its
value in economic research. Stansel made
opening remarks on “Economic Freedom of
North America: Overview & U.S. in Focus.”
Murphy discussed “The Legal System
and Protection of Property Rights at the
Subnational Level” at the Public Choice
Society meeting in Charleston, S.C., in March
and at the APEE annual conference in April.
At the Western Economics Association
in June, Stansel and Tuszynski reported
on their 2016 paper titled “Targeted State
Economic Development Incentives and
Entrepreneurship,” which found negative
relationship with patent activity but no
relationship with two other measures.
Stansel presented “Oil Rents and State
Economic Policy,” based on research
with Colin O’Reilly, at a conference on
Governing Natural Resources in the
American West, held by the Texas Tech Free
Market Institute in August. They found oil
windfalls didn’t lower economic freedom.
Stansel and Tuszynski (with Alex Padilla)
found no consistent relationship between
economic freedom and domestic migrants
as a percentage of state population.
Stansel discussed the research at the
Southern Economic Association meeting
in November, with a talk titled “The
“California Horse: Do Domestic Migrants
Impact State Institutions?”
Stansel discussed “Housing Prices and
Economic Freedom in U.S. Metropolitan
Areas,” based on work with Tim Allen, at
the American Real Estate Society conference
and a Florida Gulf Coast University research
seminar, both in April.
Tuszynski and Stansel were awarded a
research grant from SMU’s Mission Foods
Texas-Mexico Center for a study titled
“Institutions and Trade: An Examination
of the U.S. States and Mexico.” It found
that states with higher economic freedom
tend to engage in a more trade with other
states. Stansel made presentations based
on the research at the Public Choice
Society conference in March and the
Texas-Mexico Center’s annual meeting in
April, held in Mexico City.
“Institutions and Trade: An Examination
of the U.S. States and Mexico” was one of
two presentations by Tuszynski at the APEE
conference. The other was “Economic
Freedom and Environmental Quality
in the United States,” which found no
conflict between economic freedom and
environmental quality.
At the meetings of the Southern
Economics Association, Public Choice
Society and APEE, Stansel organized
and served as chairman for five sessions
of academic research related to state-level
economic freedom.

22 O’Neil Center 2017-18 Annual Report

 Texas Economic Freedom
The O’Neil Center developed a research interest in the Texas economy early on, focusing its first two Annual Report
essays on the Lone Star State. The Texas Economic Freedom initiative, launched in 2015, expanded our efforts to
understand key trends shaping the state’s future. The research involves comparing Texas and its major cities to their
counterparts across the United States.

Texas Economic Forum

Started in 2016, the Texas Economic Forum focuses on trends
and issues important to the Texas economy. For a fall semester
event on “The Innovation Economy,” the O’Neil Center
partnered for the second straight year with SMU Cox’s Maguire
Energy Institute and Folsom Institute for Real Estate.
Cox put a Texas spin on “The Imagination Age,” identifying
key technologies remaking the economy and assessing Texas’
assets in taking advantage of them, particularly its high degree
of economic freedom. Maguire and Folsom collaborated on a
panel of energy and real estate entrepreneurs, who discussed their
experience starting and growing companies in DFW and Texas.

For the spring Texas Economic Forum, Cox joined three

invited speakers to discuss “Trump and the Texas Economy”—an
analysis of how the president’s policies might impact the state.
Vance Ginn of the Austin-based Texas Public Policy Foundation
portrayed the Texas economy as booming, but he warned of the
state’s vulnerability to protectionist policies. Doug McCullough
of Dallas’ Lone Star Policy Institute saw benefits for the state in
Trump’s tax cuts, particularly the sharply lower corporate rates.
Cox warned that tightening immigration laws could lead to
labor shortages in Texas, with construction especially vulnerable.
Merrill Matthews of Plano’s Institute for Policy Innovation said
that deregulation could benefit the Texas energy industry. At the Texas Economic Forum, Cox (top), Ginn, McCullough and Matthews

Writing About Texas’ Economy

Cox and Alm continued to write D CEO magazine Prices” found the largest increases in DFW home
columns on the Texas and DFW economies. Their values in North Dallas and the northern suburbs.
first article appeared in October 2010—so the • Just after Internet retailing giant Amazon.com

relationship has lasted almost eight years.
The series' titles and topics for academic year
2017-18 were as follows:
• “Lagging Behind” (left) presented data
showing that Dallas proper hasn’t kept pace with its
launched its search for a second U.S. headquarters,
“Dallas and the Innovation Economy” made the
case for DFW being highly competitive in innovation
and entrepreneurship.
• “Foreign-Born Workers Important to Building

suburbs in the growth of median family income. Texas” argued that Texas faces labor shortages and
• “Taking a Closer Look at Dallas’ Housing needs more immigrants not fewer.

O’Neil Center 2017-18 Annual Report 23

 • “Dallas’ Place in the Texas Triangle” put a spotlight on a important in construction, an industry vital to a state with an
dynamic region roughly bordered by DFW, Houston and San expanding population.
Antonio, which is a tenth of the state’s land area but accounts for • In “Trump and the Texas Economy,” Alm summarized the

about three-quarters of the state economy.
O’Neil Center research on state and local economies has been
featured in The Texas Economy, the center’s online newsletter. The
quarterly published the following articles in academic year 2017-18:
• In “Listening for the Texas Twang in the Innovation Economy,”
Alm summarized the proceedings of the fall Texas Economic Forum
on innovation and entrepreneurship in the DFW area.
• Alm continued his study of the development of Texas’ economy
in “Entrepreneurs on Horseback,” which chronicled the rise of the
cattle industry after the end of the Civil War.
• In “Foreign-Born Workers in the Texas Economy,” Cox and
Alm presented data showing that Texas ranked sixth among states
in employing immigrants. Foreign-born workers are particularly
Texas Economic Forum presentations on how the president’s
policies on trade, taxes, immigration and energy are likely to
impact the state.
Stansel partnered with Vance Ginn on two op-ed articles
discussing economic freedom in the state—on September 6, “Six
Missed Opportunities in Special Session That Could Have Aided
Economic Prosperity” in the Fort Worth Star-Telegram; on January
5, “Texas Ranks Near the Top (Again) for Economic Freedom” in
the Dallas Morning News.
After Hurricane Harvey hit the Texas Gulf Coast, Davis wrote
“Want to Help Storm Victims? Cash is King,” a Dallas Morning
News op-ed contending that money would allow the battered region
to decide its recovery priorities for itself.

Student Enrichment and Public Outreach

Engaging with SMU students provides an opportunity to shape the next generation of American leaders, workers and
voters. O’Neil Center professors teach classes and offer programs that introduce the ideas of liberty and economic
freedom. Our commitment to education extends to the general public. The center sponsors speakers at SMU, makes
presentations to non-academic audiences and responds to media requests.

Teaching Free Enterprise

The donor-supported program began in 2015 and offers workshops
and curricular materials for high school teachers, with the goal of
helping them meet Texas’ mandate to provide economics instruction
with an emphasis on the free-enterprise system and its benefits.
Under Serralde’s direction, Teaching Free Enterprise moved forward
during 2017-18 with 18 workshops and a total attendance of 1,072
teachers. These teachers returned to their jobs and taught classes
with an estimated 162,000 students, suggesting a large impact for the
program.
O’Neil Center staff members continued to play a big role in Teaching
Free Enterprise. The first four curriculum units came from Lawson
(“Trade” and “Economic Freedom of the World”) and Cox (“Paradox
of Progress” and “Time Well Spent”).
Stansel and Tuszynski wrote the lesson plan for “Taxation and Public
Finance.” Before leaving, Yonai contributed “Morality and Markets” and
“Culture and Trade.” Tuszynski wrote two of the six curriculum units
added in the 2017-18 academic year—“Public Choice 1: Governments
and Markets” and “Public Choice 2: The Political Process.” Texas Tech’s Adam Martin leads a session on economic development.

24 O’Neil Center 2017-18 Annual Report

 Lawson, Cox, Stansel, Tuszynski and
Alm lectured at events in 2017-18.
Toward the end of the spring semester,
Grand Prairie economics teacher Ray
Hughel came on board as a full-time
contractor to assist Serralde in running the
TFE program.
Teaching Free Enterprise continued to
expand its reach beyond Texas. Traveling to
Mexico City, Lawson and Serralde attended
the graduation ceremony for high school
students who completed the TFE program
with our partner, Caminos del la Libertad. Graduates of the TFE program at Caminos del la Libertad high school in Mexico City.

Flourishing & A Free Society Forum

Each year, the O’Neil Center invites
prominent speakers to the SMU campus
to share their perspectives on liberty and
economic freedom. In addition to Walter
Williams, the 2017-18 roster of speakers
included Deirdre McCloskey, now at the
University of Illinois-Chicago.
She’s the author of an expansive trilogy on
the origins of capitalism—Bourgeois Virtues,
Bourgeois Dignity and Bourgeois Equality.
In her O’Neil Center lecture, attended
by more than 300 students and members
of the business community, McCloskey
discussed how the ideas of the oft-maligned
bourgeoisie led the world out of poverty
through the rise of capitalism.
Scott Sumner, a monetary policy expert
at George Mason University, presented an
analysis of the Federal Reserve’s missteps
during the Great Recession of 2008-09,
contending that the central bank would have
performed better if it had paid more attention
to the ups and downs of nominal GDP.
William J. Luther, a Kenyon College
economics professor, provided a timely
lecture on bitcoin, which had soared
in value for several years before sharp
declines in the months before the forum.
According to Luther, bitcoin is better
justified as a store of value rather than
medium of exchange.
David Henderson, an economist at
Stanford University’s Hoover Institution,
discussed how sound economic arguments
contributed to ending the military draft and
replacing it with an all-volunteer armed forces. Deirdre McCloskey

O’Neil Center Reading Groups

The O’Neil Center launched its first free
market reading group in 2014. During
2017-18, three groups, each meeting
once a week, held fall and spring sessions.
Stansel led the McLane Teammates
Scholars and Armentrout Scholars reading
groups, while Murphy guided an advanced
reading group for students who wanted to
build on their participation in a previous
O’Neil Center reading group.
The six reading groups included a diverse
mix of 72 SMU students, including majors
in economics, finance, public policy,
philosophy, statistics, history, political
science, math, international studies, health
and society, marketing, anthropology,
religion, English and Spanish. In both the
fall and spring semesters, SMU hosted a
reading group summit with students from
similar programs at Texas Tech, Baylor
and the University of Central Arkansas.
Stansel’s two fall reading groups focused
on “Economics and Social Issues: Markets
and the Marginalized,” and participants
examined how disadvantaged groups fare
in wealthy societies, reading works by such
scholars as Claudia Goldin, Walter Williams
and Thomas Leonard.
The students explored such questions
as: How do markets and government
help or hinder disadvantaged groups?
What role has race played in the history of
economic thought? What are the effects of
Continued next page

O’Neil Center 2017-18 Annual Report 25

discrimination in labor markets? What are
the consequences of mass incarceration?
Why do women typically earn less than
men? What explains persistent poverty
among Native Americans?
The summit with Tech, Baylor and
Central Arkansas students was scheduled to
give students the opportunity to attend the
Walter Williams lecture and participate in
workshops with the economist the next day.
In the spring, Stansel led his two
reading groups on “Freedom and Human
Flourishing: Poverty, Prosperity and Quality
of Life around the World.” Course materials
included works from scholars such as George Walter Williams answers questions at a reading group event.
Ayittey, Daron Acemoglu, Bill Easterly and world? How do government policies and primary readings were Law’s Order by
Deirdre McCloskey that examine the role markets affect our well-being? David Friedman and Government Failure
of personal freedom, markets and culture in The summit featured a keynote lecture by Gordon Tullock, Arthur Seldon and
promoting human flourishing. by George Mason University professor Gordon L. Brady.
The students explored such questions Donald Boudreaux on “The Myth of The theme for the spring was
as: Why are some nations prosperous Middle-Class Stagnation” and a workshop “Numeracy,” which focused on interpreting
while other remain impoverished? How with the economist later in the day. data in ways not usually covered in standard
should we measure socio-economic Murphy’s fall reading group, titled academic coursework. The two primary
progress? What role does foreign aid play “Rational Choice in Law and Politics,” readings were The Signal and the Noise by
in helping the poor? How has the quality offered a crash course in Law & Nate Silver and Superforecasting by Philip
of life changed over time around the Economics and Public Choice. The two Tetlock and Dan Gardner.

Teaching SMU Cox Students

In the fall semester, Lawson taught
three sections of Managerial Economics
to MBA and MS students. He was back
in the classroom in the spring with two
sections of Microeconomics for EMBAs,
Cox taught Managerial Economics to
PMBAs and MS students. His Markets
and Freedom summer course gave non-
business majors important lessons on
America’s free-enterprise system.
Davis taught International Finance and
Corporate Finance for both undergraduate
and graduate students, Macroeconomics
and Decision-Making under Uncertainty
for graduate students, and he was the Davis at work in the classroom
faculty adviser on student trips to China continued to teach his Evolution of During the 2018 May Term, Tuszynski
(Hong Kong and Shenzen) South American Capitalism. A shortened version taught 21 juniors and seniors in Markets
America (Colombia and Peru) and Europe formed the basis for the Certificate in and Freedom, a course that examined
(England, Czech Republic and Germany). American Capitalism, offered through the the interaction between free markets and
After stepping down as dean, Niemi SMU Cox continuing education program. broader measures of economic prosperity.

26 O’Neil Center 2017-18 Annual Report

 Working with Standout Students
In April, Tuszynski led a group of
16 undergraduate students and faculty
from five local universities in a daylong
discussion of the works of Frederic
Bastiat and F.A. Hayek. The sessions were
moderated by Bradley Hobbs (Clemson
University) and Stephen Gohmann
(University of Louisville). by Bruce Caldwell.
Luke Yeom was Murphy’s research assistant
the fall semester. The two co-authored “The
Long-Run Impact of Agricultural Diversity
on Economic Freedom,” which appeared in
the Journal of Regional Analysis & Policy.
Eric Li was Murphy’s research assistant in
the spring semester. They will continue their
collaboration this summer on a working
paper begun in the spring semester.
Radio, Television, Print
At the end of the 2017-18
academic year, SMU Cox recognized
Stansel, Cox and Davis with Media
Appreciation Awards, this year based
on the single story with the greatest
potential national exposure.
Stansel ranked second among
SMU faculty with work cited in
two Forbes articles—“Competition
Among Government Is Important
for Economic Freedom” and
“Florida Remains One of the Most
Economically Free States.” Cox
scored big with Yahoo! Finance
Television, where he was featured in
“Dallas Former Fed Chief Economist:
The Fed Has Been Behind the
Curve Over and Over Again.” Davis
received plaudits for a contribution
to “Proposed Gas Tax Increase Could
Harm Americans,” an article in the
Wall Street Journal’s “The Street.”
Davis gave dozens of interviews
to reporters seeking commentary
on economic trends in Texas. For
During the spring, Murphy worked
with O’Neil Center research assistant Nick
Whitaker on an independent study project
focused on rationality and economic
methodology. The tutorial involved
reading parts of Predictably Rational by
Richard McKenzie and Beyond Positivism
Tuszynski and Stansel worked together
to advise Whitaker on various data projects,
including a state-to-state mapping of
vehicle miles traveled for a working paper
titled “Institutions, Trade, and Economic
Prosperity: An Examination of the U.S.
and Mexican States.”
example, his insights were in “Labor
Shortage Straps Eateries” in the
Dallas Morning News, “The Trouble
with Tariffs” in the San Antonio
Express and “As Trump Tweets on
Mexico, GM Expands in Arlington in
the Fort Worth Star-Telegram.
In addition to Yahoo! Finance,
Cox gave interviews to Reuters and
NPR-affiliate KERA radio in Dallas.
The Federalist cited his expertise in
“Evidence Says Income Inequality is
Not a Problem.”
Stansel appeared as a guest
commentator on 49 radio shows,
including 22 times on the Ed Dean
Show, the No. 1 statewide radio
program in Florida. Stansel’s research
was cited in the print media at least 16
times, including the Orange County
Register and three articles in Forbes.
PJ Media covered Murphy’s
provocative working paper explaining
Tuszynski and Stansel teamed up to
advise David Shirzad, an SMU Tower
Center scholar, on a project titled
“Economic Development Incentives
in Texas: Do They Actually Bring the
Promised Benefits?”
The O’Neil Center funded Student
Research Fellowships. Seth McKelvey
(English Ph.D. student), Kyle Carpenter
(History Ph.D. student), Eric Li (SMU
Cox undergraduate), and Luke Yeom
(SMU Cox undergraduate) received
research funding from the O’Neil Center
in 2017-18. Overall, this program is
considerably under budget as it has been
more difficult than expected to recruit
students for research fellowships.
Stansel on the air
how the fad of American teens eating
Tide pods just might be rational.
While in Guatemala in May, Lee
gave an interview on free markets
and liberty for Universidad Francisco
Marroquin’s website and YouTube
channel.
O’Neil Center 2017-18 Annual Report 27

The O’Neil Center Workshop Series
brings professors from other institutions
to SMU Cox for seminars focusing on
research in progress. Building these
relationships with other academics is
an important source of professional
development for the center’s scholars.
Some of the 2017-18 academic year’s
eight seminars jibed with the O’Neil
Center’s mission of studying economic
Cox delivered the optimistic message of
capitalism as a driver of American progress
in 14 speeches. A sampling of his titles:
“Good News: Why America Is Better Off
Than You Think;” “Economic Outlook
for the U.S.: A Tale of Two Economies;”
“Age Shift: An Optimistic Perspective
on America Today and Tomorrow;” and
“The Imagination Age: Fourth Wave of
American Economic Progress.”
Most of Cox’s speeches were to business
groups and investors, such as the National
Association of Manufacturers, KPMG,
the Association of Private Investment
Murphy’s wide-ranging interests and
economic research led to the following
publications, which did not expressly
focus on issues of national or state-level
economic freedom.
• In The Independent Review, “The
Diseconomies of Do-It-Yourself” argued
that high transaction costs rather than
Lee was a regular book reviewer
for Regulation magazine. He had the
following contributions during the 2017-
18 academic year.
• “Diminishing the Case Against
Empathy,” a review of The Case Against
Empathy by Paul Bloom.
28 O’Neil Center 2017-18 Annual Report
Workshop Series
freedom—most notably, the development
of a state economic freedom index for
Brazil (Vladimir Maciel, Mackenzie
University). In addition to her public
lecture, Deirdre McCloskey presented a
seminar on aspects of her current work.
Other topics addressed in Workshop
Series included the role of cultural values in
economic reforms (Scott Sumner, George
Mason University); peer comparison and
Speaking and Writing
Consultants, United Capital and Jackson
National Life Insurance.
Stansel’s August article in Investor’s
Business Daily, headlined “It’s Time
To Reduce Spending — Unfortunately,
GOP Budgets Don’t Actually Do So,”
took issue with alarmist reports about
the Republicans’ supposedly draconian
spending cuts.
For Regulation magazine, Davis wrote
“Regulating Banks by Regulating Capital,”
which argued that it would be better to
require banks to maintain ample capital to
pay off creditors rather than attempting to
pocketbook savings better explains the
popularity of home improvement projects.
• A Journal of Private Enterprise
article titled “The Perils of Buying Social
Capital Locally” contends that feel-good
campaigns urging consumers to “Buy
Local” results in an overinvestment in
social capital.
• “Pride in Staying Out of Jail,” a review
of Read my Lips: Why Americans are Proud
to Pay Taxes by Vanessa Williamson.
• “Loving the Poor, but Loving
Political Privileges More,” a review of
Dream Hoarders: How the American
Upper Middle Class is Leaving Everyone
CEO pay (Korok Ray, Texas A&M); the
regulatory state (Art Carden, Samford
University); links between immigration
and corruption (Ben Powell, Texas Tech);
populism in Latin America (Nicolas
Cachanosky, Metro State University);
the origin of institutions (Boris Nikolaev,
Baylor University); and measuring human
trafficking (Greg DeAngelo, West Virginia
University). 
police foolish decisions.
Before leaving the O’Neil Center, Yonai
delivered several speeches: “Rational
Irrationality Operationalized: Incivility,
the New Normal” at June’s Western
Economic Association meeting in San
Diego; “Markets and Morality” at the
American Teaching Initiative in July; and
“The Need for Free Enterprise in Business
Education” at Wheeling (W.Va.) Jesuit
University in October. In September,
he moderated a session on “The Rule of
Law” for the National Review Regional
Fellows Program.
• “Sorry, Europe, America is Already
Great,” published in May by Arc Digital,
pointed to several things Europhiles claim
are evidence of European superiority are
actually evidence of American superiority.
A review of the book Choice by Richard
Harper, Dave Randall and Wes Sharrock
for Contemporary Sociology.
Else in the Dust by Richard Reeves.
• “Becoming More Sympathetic with
Black Lives Matter,” a review of Locking
up Our Own by James Forman Jr.
• “Imagine What Future Generations Will
Think of Us,” a review of WTF: An Economic
Tour of the Weird by Peter T. Leeson.
 After its founding in 2008, the O’Neil Center
made its public debut with a conference on the
theme “What Do Businesses Need to Succeed in
Today’s Competitive Global Economy.”
The inaugural conference’s speakers included
Dallas Fed President Richard Fisher, O’Neil Center
donor William J. O’Neil and Texas Instruments
CEO Richard Templeton. Another speaker on the
program: Bob Lawson, who would join the O’Neil
Center in 2011 and become its director in 2014.
The conference was the start of one of the
O’Neil Center’s signature contributions to SMU’s
intellectual climate—inviting distinguished scholars
and business leaders to public forums.
Here are some of the O’Neil Center speakers
from the past 10 years:

2009: Thomas Sowell 2011: John Mackey 2012: James Tooley

Hoover Institution CEO, Whole Foods The Beautiful Tree

2015: George Will 2015: Phil Gramm 2016: Matt Ridley

Political Commentator Former U.S. Senator The Rational Optimist

Other Voices … (affiliations at time of SMU speeches)

2009 Warren Stephens 2013 2015
Thomas J. Falk Stephens Inc. Bryan Caplan Arthur Laffer
CEO, Kimberly-Clark Michael Tanner George Mason Laffer Associates
2010 Cato Institute University James K. Galbraith
John Allison 2012 Arthur Brooks University of Texas
Ex-CEO, BB&T Bank Russ Roberts American Enterprise 2016
Stephen Moore EconTalk podcaster Institute Steve Forbes
Wall Street Journal Ben Powell 2014 Forbes magazine
2011 Free Market Institute David Boaz Edward Glaeser
John Stossel Texas Tech University Cato Institute Harvard University
Fox News Michael Munger Sylvia Nasar
Duke University A Beautiful Mind
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